A new report conducted on behalf of API by Robert Shapiro of Sonecon, LLC, examines the financial impact of investments in oil and natural gas companies on the overall performance of the two largest public employee pension funds in each of four states - Michigan, Missouri, Ohio and Pennsylvania. The data shows these investments sharply out-performed the funds' other assets.
In this podcast, Shapiro, the former undersecretary of commerce to President Bill Clinton, discusses the new study that builds on a 2007 Sonecon report that showed millions of Americans own oil and natural gas holdings through mutual funds, pensions, and 401(k)s. Only 1.5 percent of holdings are with corporate management.
Use the audio player below to listen to information about the article and follow along with the show notes. I hope you find the podcast informative.
00:16 You've probably seen the television commercials that ask whether you own an oil company. Chances are you own a portion of an oil company through your 401(k) or pension plans. In order to determine the benefits of owning oil company shares, API recently commissioned a study to determine how oil and natural gas company investments are contributing to the pension plans of retirees in several states. Robert Shapiro of Sonecon, the company that examined the data, is on the telephone to explain his findings.
00:51 Rob, first tell our listeners about your company and the kinds of studies that you routinely conduct.
00:57 Mr. Shapiro: We try to bring rigorous economic analysis to issues of importance for public policy.
01:06 With regard to the pension study, can you briefly describe your methodology, how many states are covered and who is covered under those pensions?
01:19 Mr. Shapiro: This is really an interim report. We will publish a larger report in a few months which will cover the public employee pension plans in 17 states. It will include a majority of both the members of public employee pension funds and the assets. We have an interim report on the first four states which were Michigan, Missouri, Ohio and Pennsylvania. We identified the two largest state employee pension funds within each state. In each case, they covered the same groups of people. One was always the teachers' pension fund and the other was employees of the state government. We then looked at their annual reports to determine what share of their assets, year-to-year, were held in energy companies, 98 percent of which are oil and natural gas companies. Then we tracked the returns on those investments compared to the returns on the rest of the portfolio that the pension funds maintain. We tracked this over five years, from 2005 - 2009. That covers both years of strong expansion and years of deep recession. We found that these assets outperformed the rest of the portfolio and their returns were higher by about three or four times.
03:14 Data for four states has been released. Let's take those states one at a time. First, Ohio. What did you find in Ohio?
03:09 Mr. Shapiro: We found that oil and natural gas assets made up 4.6 percent of the total assets of the two largest public pension plans in Ohio. But they contributed 9.5 percent of the total returns. If you invested a dollar in oil and natural companies in the two public employee pension funds in Ohio in 2005, it was worth $1.48 five years later. A dollar invested by them in all other assets was worth $1.11. That is a very big difference.
04:27 It shows that oil and natural gas company earnings are a very good thing for pension plans.
04:32 Mr. Shapiro: It certainly has been over the last five years.
04:35 Let's take a look at Missouri. What did you find there?
04:38 Mr. Shapiro: It was similar to what we saw in Ohio. The return on a dollar invested by those funds in oil and natural gas stocks in 2005 was worth $1.41 in 2009. There was a 41 percent return over the five years. A dollar invested in all the other assets of that fund in 2005 was worth $1.10 in 2009. You have a 41 percent return versus a 10 percent return and that meant that oil and natural gas stocks while representing only 3.3 percent of the total assets of those two Missouri pension funds, they produced 9.2 percent of all the returns.
05:35 Were the numbers similar in Pennsylvania?
05:39 Mr. Shapiro: In Pennsylvania, the dollar invested in 2005 in oil and natural gas stocks by the two largest pension funds grew to a $1.48 by 2009, which was a depressed year on the stock market. A dollar invested in all other assets produced an average return of $1.15. You have a 48 percent return over five years compared to a 15 percent return over five years. In the case of Michigan it is very similar. It is a 49 percent return over five years in oil and natural gas investments versus a 17 percent return on all other assets.
06:40 About four years ago, your company did a study dealing with oil and natural gas company stock and who actually owns it. Tell us, how much of that stock is actually owned by American consumers including retirees enrolled in these plans?
07:27 Mr. Shapiro: The fact is the oil and natural gas industry is no different than any other big industry in this regard. A lot of people think that oil, finance, steel, auto and all the other big industries in the U.S. economy are primarily owned by insiders like CEOs and top level executives. However, about 1.5 percent of the shares of oil companies are held by the officers and board members of those companies. That is comparable to other industries. Similarly, if you look at who is holding the other 98.5 percent of the shares, more than 60 percent is being held by either mutual funds or the companies that manage large portfolios for pensions. There is another 9 percent that is held directly by pension plans and insurance companies and foundations. Finally, you have 30 percent that are held by individual investors who manage their own holdings and are not insiders. The ownership of oil and natural gas companies is as broadly based as the ownership of any of the other basic industries in our economy.
08:43 What do you say to people who are critical of oil and natural gas industry earnings? Aren't they really being critical of the benefits that are going to millions of American consumers and retirees?
09:02 Mr. Shapiro: Those earnings go to two places. They go to the dividends and the value of the stock that is held by pensions and people saving for their retirement. That comprises the overwhelming majority of the ownership of these companies. The other place where oil and natural gas company earnings go is into investment. The oil and natural gas industry has enormous investment needs. It costs a lot more money to drill a well than to put 100 computer programmers in a building and say come up with a new application or a new software program. I am not criticizing the software industry. It is a brilliantly successful industry as well, but the fact is, the investment requirements and the R&D requirements for energy are very high. That is the other place those earnings go. They go to the retirement plans of both average Americans and certainly the beneficiaries of the major pension plans in the country. They are public employees or auto workers and the earnings also go toward investments that generate returns in the future.
10:42 Thank you so much, Rob, for sharing your insights and your data with us, and thank for joining us on EnergyTomorrow Radio.